India Can Gain from US-China Trade Rift, Says Raghuram Rajan

If We ‘Get Our Act Together’

April 9, 2025

Raghuram Rajan, a former head of the Reserve Bank of India, believes that the current tensions between the United States and China could work in India’s favour. The uncertainty caused by the conflict will likely compel companies to look for safer and more stable countries to do business with. If India acts smartly and quickly, it could attract more trade and investment, he explained in a media interview.

U.S. President Donald Trump has announced significant tariff increases on imports. A universal 10% tariff has been imposed on all imported goods, with higher rates targeting specific countries based on trade deficits. China faces an additional 44% tariff, totalling 54%, while India has been subjected to an extra 16%, culminating in a 26% tariff on its exports to the U.S. These tariffs have led to immediate global economic repercussions.

However, India currently does not export a lot to the U.S. when compared to the size of its economy, pointed out Rajan, in an interview with India Today. So, even if the ongoing trade conflict has some negative effects on Indian exports, it won’t be strong enough to shake the country’s economic foundations.

But he stressed that this should not be a reason for India to sit back and do nothing.

He urged the government to reduce tariffs, which are taxes on imported goods. Doing this wouldn’t just help in making deals with the U.S., but would also show that India is open for business more broadly. He expressed concern that India has been quietly increasing tariffs in recent years, which discourages international trade. Cutting these tariffs now, he argued, could help India become more competitive in the global market.

Rajan also encouraged India to improve its connections with other countries and trade groups. He mentioned the importance of reconsidering its earlier decision to walk away from agreements like RCEP (the Regional Comprehensive Economic Partnership) and suggested strengthening ties with ASEAN countries, Japan and even China. Though India has a big trade deficit with China—meaning it imports much more from China than it exports—Rajan said it would still be wise to try to build a more balanced trade relationship with them.

Another point he raised was the impact of U.S. tariffs on global supply chains. As American tariffs on Chinese goods increase, companies may want to shift their factories and supply routes to other countries to avoid paying those high taxes. India could become one of those new options—especially if it presents itself as a low-tariff, business-friendly country.

But if the U.S. continues with extreme tariffs on countries like China and Vietnam, it could cause a global economic slowdown, Rajan added. A global recession, he said, is not out of the question if this pattern continues.

Rajan said that this moment of global uncertainty is exactly when India could shine, but only if it makes the right decisions quickly.

However, he warned that attracting investment won’t happen just by lowering tariffs alone. India also needs to create a more welcoming environment for businesses. This means making tax rules clearer and more consistent, and putting an end to sudden, harsh actions by tax authorities. Investors prefer stability and fairness, and Rajan believes India must deliver on those fronts if it wants to be taken seriously.

India’s business environment faces several challenges. High logistics costs remain a significant concern, inflating operational expenses and diminishing the competitiveness of Indian products in global markets. The Goods and Services Tax (GST) system, while streamlining taxation, presents complexities in compliance, particularly for small and medium-sized enterprises (SMEs), due to frequent regulatory changes and intricate filing requirements.

Access to credit is another hurdle for SMEs, as stringent lending criteria and limited financial histories often restrict their borrowing capacity, stifling growth and innovation. Furthermore, the slow pace of dispute resolution, due to protracted legal proceedings and bureaucratic delays, undermines investor confidence and hampers timely business operations.

Rajan said, with countries like Vietnam and Mexico also facing trade troubles, and some others dealing with political tensions, India could become a more attractive option—if it shows that it is stable and serious about reform. As Rajan put it, India is not seen as a dangerous or unpredictable country in global politics, which makes this a good moment for it to act—but only if it takes the necessary steps without delay.

Rajan praised the Indian government for not reacting hastily and called for a carefully planned response.

On a more positive note, Rajan spoke about India’s services exports—things like IT, finance and customer support—which have been mostly unaffected by the U.S.-China dispute. In fact, India now earns more from exporting services than it does from exporting manufactured goods. This, he said, gives India some protection from the current global trade tensions.